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Why Capitalism Won’t Be Saved by Politics

Thank you to Fred Smith for his reply to my comments. In his follow-up he reiterated his desire for business to cease lobbying like they are a business and start advocating like an ideological group. According to him, public choice scholars have been losing the battle of ideas by focusing only on the negative role of business, and entrepreneurial business elites have not been pulling their load in pressuring government toward free market policies. In my previous post I’ve explained my skepticism about the possibility of a shift in strategies and emphasis that Smith calls for. I also highlighted the features of the political system that would make such lobbying efforts incremental at best. Here I want to elaborate more broadly on why capitalism is not going to be saved by politics.

Let me begin by saying that Smith underestimates the success of free market promoters. From my perspective, since the 1980s conservative and libertarian think tanks (like the Cato Institute) have done good job changing the terms of debate about the welfare state. Perhaps it has not shrunk as much as he and others would like but it has not grown to the degree that someone like Hayek might have imagined (and that includes Obamacare). In democratic politics, stasis is often victory.

That is small comfort to those like Smith who believe free markets will make society better, and that the nation is wasting precious opportunities and resources by not challenging statism. Since Smith believes that citizens are rationally ignorant and fail to see the social benefits of free markets, he shrewdly sees that intellectuals must create the kind of pro-capitalism moral narrative that both citizens and policymakers can grasp readily.

Smith is right that ideas matter, and ideas with moral weight matter even more. Although I disagree with Smith’s goal of radical free markets, I agree that current arguments in support of free markets do not inspire widespread political action. Of course, economists like Milton Friedman have made moral arguments for capitalism, which continue to resonate with many people. But perhaps the effect is limited because such arguments have been made primarily by economists who, by training, write with a limited conceptual palette. It would certainly help if economists wrote less with equations and more with words. And it would help the cause even more if such ideas spread to other disciplines, where different concepts and understandings might be applied.

However, even if public choice intellectuals could frame a positive narrative, the second part of Smith’s strategy – getting business elites to evangelize the message – is not going to succeed for the reasons I mentioned in my previous post. I’ll add one other point. It is not just the business rent-seekers that undermine Smith’s project. It will be the voters who will not buy into what Smith sees as capitalism’s virtues. It is not necessarily because voters are rationally ignorant but because they are risk averse. Markets create winners and losers. Even if the losers face a temporary setback, what is temporary for someone with no job, no healthcare insurance, or a mortgage in foreclosure? Democratic governments will compensate the losers because they are voters. Indeed, failing to do so could create the kind of social unrest that undermines the stable environment that allows markets to work reasonably well. If the democratic process is responsive and accountable to voters, then all the pro-market lobbying in the world will not alter the government’s inclination to intervene in the economy. I support this trade-off between democracy and capitalism, but Smith probably does not.

The other writers in this current issue of Cato Unbound — Ansolabehere and Parisi – have eloquently explained why investments in politics have limited and uncertain payoff. I suggest another strategy for those seeking broader change. I am no fan of Ayn Rand’s ideas and her literary style is dreadful, but her books have inspired millions of young people. I hear her arguments echoed in my classes every semester. So instead of politics, invest in novels.

Also from this issue

Editorial Note

Lead Essay

Fred L. Smith Jr. argues that while public choice economics can be a powerful tool, it has focused far too much on failure rather than success — markets fail; governments intervene; governments fail in their turn. We are told again and again that there is too much money in politics, and yet, if we quantify the returns to be had from lobbying, we discover that businessmen have actually been holding back. This suggests a previously underappreciated virtue on their part.

Response Essays

Stephen Ansolabehere recommends a shift in focus, away from normative claims and toward using money in politics as a tool for understanding the distribution of political power. He shares several of the more important findings from research in this direction and downplays the return on lobbying investment, characterizing it as “modest, at best.”

Raymond J. La Raja argues that American political institutions work against would-be buyers of special favors. The party system, the structure of our Constitution, and the difficulty of crafting a national media campaign all mitigate against rent-seeking behavior. That said, the lucky few still manage to earn outsized returns, even while many lobbyists go away with nothing. La Raja is skeptical that businessmen can work the political system toward better governance, and he doubts that the Public Choice school would make an apt partner in the effort.

Francesco Parisi argues that markets for political goods are highly inefficient and seldom work like traditional ones. Unexpectedly low levels of political advocacy effort do not reflect a hidden virtue on the part of would-be rent seekers. On the contrary, they indicate that simply that hidden additional costs exist in this area of effort, and that the rents to be sought are not as cheap as they may appear.

Disclaimer

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